From Incubation to Exit in Biotech

BIO2024 – Two sessions related to M&A in biotech, each offering unique perspectives while sharing common themes

“From Incubation to Acquisition – The Growth Journey of an Early-Stage Company” centered around Serotiny, a therapeutic discovery company that designs new genes for next generation cell and gene therapies and its entrepreneurial journey from incubation, VC funding, strategic partnerships, to ultimately its acquisition by Johnson & Johnson this last April. The panel consisted of Colin Farlow, its Co-Founder and CEO, Eric Moessinger of ND Capital, the VC investor, and Matt Lorenzi and Leo MacDonald of Johnson & Johnson, the ultimate acquirer. The second session was a “Fireside Chat with John McDonald”, Corporate Vice President, Global Head of Business Development and M&A at Novo Nordisk.

How the relationship evolved from initial exploration to partnership and ultimately to acquisition is a fairly standard pathway taken by most strategics and should not be snubbed by startups when they get expressions of interest early on. For J&J the driving thesis was equally about the philosophy of science as getting excited about the science itself and the team. In the case of Serotiny, J&J found a clear area of focus, a culture that was extremely collaborative, one that didn’t shy away from asking those really difficult questions. Massive strategics can be intimidating and there’s always a fear of rapidly getting swallowed. However, they offer significant benefits that make early engagement appealing. Their extensive resources can help navigate complexities and shorten the preparation time for clinical trials and regulatory submissions. Also typical was the evolution of a slow start in establishing the relationship, only to accelerate rapidly once there was an executive sponsor who would champion the platform and the company. Ever how much the acquisition was already touted as a success, some cultural and operational differences were emerging, one example being that Serotiny would have very frequent, all-team meetings. Luckily strategics have seasoned integration teams that can flush out those issues, see what works, what doesn’t, and not unnecessarily force an operating ‘mold’ that would destroy the attractiveness and uniqueness of the acquired company.

For founders, cultural, philosophical, operational, and geographical considerations will also weigh prominently in the equation. The smart ones recognize that it is part of their legacy, especially as they will relate to the teams that helped them build their company, especially post-acquisition. As is so often the case, the difficult decision to sell a company and the stress it brings is compounded by other life changing events and decisions. In the case of this CEO, it was the start of a family around the same time of the acquisition.

Summarizing the first panel, if you have something unique, there will be interest early on. Starting with a partnership is a safe route. Strategics do like to get in early and can add real value, for example accelerate a product to market by assisting in clinical trials and regulatory submissions. It is one of the reasons why large strategics will usually win over financial buyers as they bring deep domain knowledge, resources, and the wherewithal to accelerate the challenging regulatory pathway.

The Fireside Chat with Novo Nordisk’s John McDonald touched many of the same points, covered a couple of examples, but also gave some honest insights on how competitive the M&A market has gotten and also how strategics will value your company. Both aspects hold the key to getting the highest valuation and best possible deal structure for you and your shareholders. You may already have a long courtship and cozy working relationship with a major strategic, but at the end of the day, when you’re ready to sell, you have a fiduciary responsibility to assure that you capture the full value potential of your company. Only a competitive bidding process with multiple parties can achieve this. The already embedded strategic partner may still present the best and final offer, but it will be significantly better if there is competitive tension, and they face a real risk of losing out.

Most strategics are flush with cash and will look at every global opportunity, as John put it “from the top of the list to the bottom and then back to the top” that is aligned with their core business. For Novo Nordisk, diabetes and obesity are their ‘heart and soul’. Other important areas are cardiovascular, rare diseases, single-cell, proteins and peptides, but they’re always exploring and try to learn and understand spaces they’re not in yet. As most, Novo Nordisk does not like to invest big money in early-stage companies. Instead, they like to partner for a couple of years. Unfortunately, as good companies mature and become more attractive, the competition also becomes fierce.

If it is truly something unique -John gave the example of 500+ me-too companies competing for attention in the small molecule space- and the product has reached Phase 2 or Phase 3 trials, it will get the attention it deserves. John validated a core value we as sell-side investment bankers live by; don’t work you valuation up as a multiple of trailing twelve months revenue or EBITDA but work it down from the accretive revenue or strategic potential your company represents to the buyer. A prospective buyer’s commercial teams play an important role in characterizing the market potential of your company and products, they also do at Novo Nordisk. It doesn’t necessarily mean that a company will pay you dollar for dollar what they’re projecting out, but it should feature prominently in the valuation discussions.

As we approached the end of the session, John’s excitement was palpable as he spoke about the vast amount of innovation he anticipates in the coming years. His enthusiasm suggested a strong appetite for more acquisitions, leaving us to wonder—could your company be next?

For an exploratory discussion about M&A options, contact us at info@the.merger.company

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